Simple vs discounted payback
The simple payback period divides the initial investment by the annual cash flow — it ignores the time value of money. Fast, but it overstates how attractive long-payback projects are.
The discounted payback period discounts each year's cash flow by the cost of capital, then counts how many years until the discounted cumulative cash flow equals the initial investment. It's always longer (and more realistic) than simple payback.
When to use payback period
- Quick screening: rule out projects that can't recover the investment fast enough.
- Liquidity-sensitive decisions: when you need capital back by a deadline.
- Risky environments: shorter paybacks mean lower exposure to uncertainty.
Payback ignores cash flows beyond the recovery point, so it's not a complete metric. Pair it with NPV or IRR for full analysis.
FAQ
What's a good payback period?
Depends on the investment type and risk. Equipment purchases: 2-5 years is common. Real estate: 10-20 years. Energy upgrades (solar, HVAC): 5-10 years is typical.
What if cash flows are uneven?
This calculator assumes level annual cash flow. For uneven cash flows, sum them year by year until cumulative equals the investment.